How to Link Sales Compensation to Activities
Sales compensation plans are critical in motivating sales teams to drive company success. If a compensation plan is truly going to be effective, though, it has to directly link to an action that aligns with the broader goals of your company. When designed correctly, these plans reward performance but also create behaviors that will continue to push the business in the right direction.
In this guide, we’ll discuss linking sales compensation to specific actions, tracking those metrics, and how technology can streamline the process for optimal performance.
Developing Appropriate Compensation Linked to Individual or Group Performance
Compensation is a major determinant of sales behavior. Without a strategic compensation plan design, one either risks incentivizing the wrong behaviors or loses the chance to reinforce the right ones that will move the business toward its objectives. Clear linkage of compensation with predefined actions helps businesses ensure that their sales teams will focus on goals that truly matter.
For instance, if your objective is to gain market share, you might reward the sales representatives for winning new customers, rather than relying on repeat business from existing clients. Similarly, if the outcome you want is the growth of revenues or rising sales volume, compensation related to such shall be directly linked to metrics on the number of new deals closed or the cumulative sales made over a certain period.
- Gain market share: Incentivize reps to win new customers rather than doing repeat business with current ones.
- To incentivize volume of sales: Consider connecting compensation directly to the volume of sales representatives drive in a quarter or year.
- Cash flow objectives: Implement commission structures in line with the long-term goals but do not sacrifice other motivations.
Stuff to Watch Out For
Another mistake many organizations make is capping bonuses or capping incentives. By putting a cap on the amount that a top performer can gain, organizations may take away reasons for their best sales reps to overachieve beyond their quotas. This caps their motivation to push hard beyond the target once they have reached the cap, lowering overall revenue potential.
In other words, uncapped commissions let high performers continue to pursue greatness, unfettered by cap-and-brim artificial limits on their earnings potential. This, of course, incentivizes sales reps to overperform, but it adds the important assurance that the company actually benefits from that continued success.
Establishing a Goal Hierarchy
First comes the need to establish a goal hierarchy for your organization in order to effectively link compensation to the right actions. This hierarchy should be outlined in both long-term strategic objectives and short-term performance goals, which then become the guideline to spawn those specific sales actions that drive results.
Tying Compensation to the Company’s Goals
When you have defined your goal hierarchy, it will be the time to outline those very specific sales behaviors driving those outcomes. If one of the major objectives was to increase revenue in a certain region, then a clear reward would logically be to incentivize the sales reps in that area either to focus on high-value deals or sell to specific market segments.
What is important is to align sales compensation to:
- Revenue Growth: Get reps to pursue larger deals or push the average deal size higher.
- Customer Acquisition: Encourage reps to focus more on acquiring new customers rather than upselling to current clients.
- Market Penetration: Design remunerations at variance, in that sales representatives are rewarded for penetrating a new market or one with greater market share.
Sample of Goal-Based Remuneration
For example, a business may want to grow revenue of a specific product line by 20% over the next year. To incentivize this, it may design a compensation plan where sales representatives are incentivized based on the number of units sold or total revenue generated due to that product line. What’s more, they could add some weight in terms of additional commission for overachievement, so the reps have the motivation to strive higher than just minimum set targets.
Measuring Sales Compensation Metrics
No compensation plan is complete without explicit metrics to measure performances. Metrics provide the necessary data to evaluate whether the actions tied to compensation are driving the desired results. In their absence, it is impossible to say whether the plan serves its purpose of effectively motivating sales representatives to keep them in line with business goals.
Key Metrics to Track
- Quota Attainment: This is the degree to which reps attain their sales quota. It represents a basic metric necessary in order to know how effective a compensation plan is.
- Sales Volume: It tells about the quantity of a single unit sold, or it can, at times, refer to the revenue made. This is an important metric on which a company bases its functioning if it has to increase sales volume or venture into new territories.
- Customer Acquisition Cost: Informs the assessment of efficiency for incentive structures for customer acquisition-if the CAC is too high, one might have to revisit compensation plans.
- Sales Cycle Length: This refers to how long it takes one of your salespeople to close out a deal. What you’re aiming for here is to make the sales cycle as short as possible, and this is more often than not tied to compensation plans in place to help improve efficiency.
The Role of Sales Commission Software
Measuring and managing sales compensation metrics is a very labor-intensive process without the right tools in place. Sales commission software automates much of the process of managing compensation, allowing metrics to be tracked much more accurately and in real-time. Integrating into CRM and sales data platforms, these tools are able to calculate commissions automatically, generate performance reports, and provide visibility to how compensation is driving sales outcomes.
Benefits of Sales Commission Software
- Precision: This means fewer errors in calculating commission, thus guaranteeing that the correct amount is paid to the sales representatives.
- Real-time Tracking: View real-time earnings by the representatives to give them a fair idea of where they stand and, therefore, motivate them to meet or perform better than their targets.
- Transparency: The sales representatives and managers have clear insight into how commissions are calculated and paid, thus ruling out any confusion and building trust.
Performance-Based Adjustment of Compensation Plans
Tying rewards to behavior has the added value in that it allows one to course-correct in real time against actual performance. If for whatever reason a certain incentive isn’t getting the proper result, or if a specific behavior isn’t being generated, then a business can make the turn and readjust the plan on the fly.
Data-Driven Adjustments
Sales commission management tools have dashboards and analytics that provide the ability for a company to visualize performance and understand the real implications of compensation plans on actual sales outcomes. If certain metrics, such as quota attainment or revenue growth, do not align with company goals, then that can be adjusted in real time.
For instance, a compensation plan can be designed to drive customer acquisition, but it might come at a very high cost. The onus, in this case, would be on the reform of commission structure either by reducing emphasis on lower-value deals or rebalancing incentives to emphasize higher-value clients. In this way, businesses can optimize compensation strategies for better results.
The Role of Technology for Compensation Management
In a nutshell, today’s businesses cannot do without technology as far as sales compensation management is concerned. Sales management software automates the entire commission calculation and distribution pipeline, providing visibility into how compensation is driving performance.
The Benefit of Compensation Management Automation
- Efficiency: Automation replaces manual tasks and reduces burdens for a sales manager in administration, while freeing his resources to think more strategically about how to improve performance.
- Scalability: In general, with growth, automating compensation management means an increase in the ability of incentive plans to grow without added complexity or manageability.
- Improved Accuracy: It will eliminate the manual errors in commission calculations that can often short or delay reps’ commission payments.
- Insights: Analytics tools grant complete visibility into how these different compensatory plans drive sales; data-driven decision-making is enabled.
Conclusion
Linking sales compensation to the right behaviors is critical in driving the right behaviors necessary to attain the business objectives. Drawing from clear goals and applying the right metrics, technology is fundamental in making automation of compensation management effective for businesses to keep their sales teams motivated and focused on the priorities of the business.
In addition, automation provides accuracy, efficiency, and transparency that enhance performance and long-term success.
